The Stakes Have Gotten Higher for Greece Weekly Update – June 29, 2015

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of
FreeDigitalPhotos.net/Stuart Miles

Markets lost ground last week, giving in to nerves about Greece and some early second-quarter earnings reports. For the week, the S&P 500 dropped 0.40%, the Dow fell 0.37%, and the NASDAQ lost 0.71%.

Crumbling Greek debt talks were in focus again last week as the deadline toward the June 30 expiration of Athens’ bailout program edges closer. Though Greek leaders asked for a one-month extension of the bailout, creditors rejected the request, pushing the stakes much higher for Greeks.

The threat of a liquidity crisis – inevitable if Greece is ejected from the Eurozone – sent Greeks scrambling to withdraw funds from bank accounts. Sources say that over one-third of ATMs in the country ran out of cash. Though Greek banks are dealing with record withdrawals, the European Central Bank announced Sunday that it will cap emergency support for banks at current levels, leaving their cash reserves seriously depleted. If Greek leaders lock down access to accounts, ordinary Greeks could suddenly find the euros in their accounts converted to another currency if Greece exits, seriously complicating their ability to buy goods and services until the financial system recovers.

While a crisis is already underway in Greece, it’s very unlikely that serious issues will make their way to U.S. shores. Why? As the chief economist of First Trust puts it, “Greece is Detroit, Not Lehman.” In terms of international impact, a Greek default will look more like Detroit’s bankruptcy than the collapse of Lehman Brothers in 2008. Lehman Brothers played a significant role in financial markets and its sudden collapse shocked the world, helping to trigger the financial crisis.

In contrast, Greece’s contribution to the world economy is miniscule, and the country’s financial problems have been going on for years. While there is no way to know for sure how a Greek exit will affect financial markets, we believe that markets and economies worldwide are already prepared for the eventuality. Though we may see short-term volatility and a possible market retreat, we believe that many fears are overblown.

Looking ahead, Thursday’s June jobs report will be the highlight of the Independence Day shortened week. Investors will be weighing the latest job market data to predict how soon the Fed may raise rates. Markets will also be looking toward Greece as the bailout deal nears expiration on Wednesday.

ECONOMIC CALENDAR:

 Monday: Pending Home Sales Index, Dallas Fed Mfg. Survey

Tuesday: S&P Case-Shiller HPI, Chicago PMI, Consumer Confidence

Wednesday: Motor Vehicle Sales, ADP Employment Report, PMI Manufacturing Index,

ISM Mfg. Index, Construction Spending, EIA Petroleum Status Report

Thursday: Employment Situation, Jobless Claims, Factory Orders

Friday: U.S. Markets Closed For Independence Day Holiday

6292015

HEADLINES:

U.S. economy contracted in Q1. The latest government data shows that Real Gross Domestic Product growth, the leading indicator of U.S. economic activity, contracted by 0.2% in the first quarter of 2015.

Consumer spending surges in May. Spending by American consumers recorded its biggest gain in nearly six years. Consumer spending rose 0.9% on strong demand for big-ticket items like automobiles.

China lowers interest rates again. In an effort to boost their sluggish economy, Chinese central bankers lowered interest rates for the fourth time and eased lending rules for small businesses.

Factory growth drops. Growth in manufacturing activity in U.S. factories slipped in June for the third month in a row, dropping to the lowest level since October 2013. The data could suggest that the economy didn’t rebound as much as expected in the second quarter.

What Did the Fed Announce on Wednesday? Weekly Update – June 22, 2015

Image courtesy of freedigitalphots.net/ddpavumba

Image courtesy of freedigitalphots.net/ddpavumba

Last week, markets shrugged off concerns about deadlocked Greek negotiations and rallied on strong economic data, sending the NASDAQ to a new historic high. For the week, the S&P 500 grew 0.76%, the Dow rose 0.64%, and the NASDAQ gained 1.30%.[i]

The Federal Reserve wrapped up its June meeting on Wednesday surprising no one with the announcement that the central bank will keep rates at zero percent for a while longer. Though the Fed appears to be confident that the economy is growing modestly, officials prefer to maintain the status quo until they’re more certain that rate hikes won’t harm the recovery.[ii]

We don’t yet know when the Fed will begin raising interest rates, but a number of respondents to a recent survey are betting on a third-quarter rate hike.[iii] Are rate expectations already baked into stock and bond markets? It’s hard to know for certain, but the Fed has been doing a good job of laying the groundwork for future rate moves, so we can hope that markets won’t overreact when rates start to go up.

Negotiations between Greece and its European lenders broke down again Thursday, weighing on European stocks. Greece is trying to negotiate a new round of credit from European lenders that would allow it to make scheduled debt repayments by the end of June. Negotiators have not been able to reach a deal that would satisfy creditors’ need for budget cuts and pension reform. Though Thursday’s meeting was billed as a last-chance effort to break the deadlock, some time remains before Greece formally falls into default.[iv] How will the game of chicken end? We don’t know.

Looking ahead, European and Greek leaders will hold an emergency summit on Monday to attempt to resolve the bailout gridlock. Panicked about what would happen if Greece defaults on its debt payments and leaves the Eurozone, depositors have been withdrawing cash from Greek banks, leaving some insiders speculating that Greek banks may not be able to reopen next week. If negotiators are unable to reach a compromise before the end of the month, we can expect the breakdown to cause markets to turn volatile. We’ll keep you updated as necessary.

ECONOMIC CALENDAR:

 Monday: Existing Home Sales

Tuesday: Durable Goods Orders, PMI Manufacturing Index Flash, New Home Sales

Wednesday: GDP, EIA Petroleum Status Report

Thursday: Jobless Claims, Personal Income and Outlays

Friday: Consumer Sentiment

06-22-2015

 

HEADLINES:
Housing starts fall in May. Groundbreaking on new houses fell last month, but a surge in permits for new construction suggests that the pause may be temporary and that the housing sector will see strong growth this season.[v]

Jobless claims fall more than expected. The number of Americans filing new claims for unemployment benefits fell more than expected, remaining below the key 300,000 level for the 15th week in a row.[vi]

Inflation sees biggest gain in two years. Consumer prices jumped in May by the largest amount since 2013. The data indicates that price drops relating to gasoline savings may be over and that inflation is returning to trend.[vii]

Apartment rentals reach historic high. Occupancy rates in apartments reached 95.3% in May, the highest level on record, as Americans of all ages move into rental housing in droves.[viii]

 

[i]https://www.google.com/finance?chdnp=1&chfdeh=0&chdet=1434757045361&chddm=1955&cmpto=INDEXDJX:.DJI;INDEXSP:.INX;INDEXNASDAQ:.IXIC&cmptdms=0;0;0&q=INDEXDJX:.DJI,INDEXSP:.INX,INDEXNASDAQ:.IXIC&ntsp=0&ei=j6aEVfmwNs6x2Aa8u4DYDA

[ii] http://www.cnbc.com/id/102766785

[iii] http://www.cnbc.com/id/102759995

[iv] http://www.cnbc.com/id/102770738

[v] http://www.foxbusiness.com/economy-policy/2015/06/16/housing-starts-pause-after-gains-permits-soar/

[vi] http://www.foxbusiness.com/economy-policy/2015/06/18/weekly-jobless-claims-fall-more-than-expected/

[vii] http://www.foxbusiness.com/economy-policy/2015/06/18/consumer-inflation-sees-biggest-gain-in-more-than-two-years/

[viii] http://www.cnbc.com/id/102770312

The Greece Problem Explained – Weekly Update – June 15, 2015

Image Courtesy of FreeDigitalPhotos.net/StuartMiles

Image Courtesy of FreeDigitalPhotos.net/StuartMiles

Markets ended last week mixed, falling on Friday as concerns about the debt impasse in Greece outweighed upbeat domestic data. For the week, the S&P 500 gained 0.06%, the Dow grew 0.28%, and the NASDAQ fell 0.34%.

So, what’s going on in Greece? For weeks, Greek leaders have been deadlocked in negotiations with creditors over the latest round of debt relief for the troubled country. Greece can’t pay its bills and is locked out of traditional credit markets because of its bad economic state. To keep the lights on and the country running, Greece has been relying on financial support from the Eurozone and International Monetary Fund since 2010. In exchange for the financial support, creditors instituted a set of austerity reforms and budget cuts designed to get Greece on sounder financial footing.

These cuts have been widely hated by Greeks, and a new government was elected in January that promised to tear up the credit agreements and end austerity measures. Since then, creditors have refused to lend Greece more money until they agree to reinstate reforms.

Why won’t Greece give in to the creditors’ demands?

Greece refuses to reinstate austerity measures because they are blamed for shrinking the economy by 21% and driving unemployment to 25% (50% among young workers). The current government would violate campaign promises if it agreed to proposed cuts to the pension system or raised taxes. Greek negotiators have asked for forgiveness of a big slice of previous loans, additional credit that’s not tied to austerity measures, as well as access to other sources of funds. Will they get all these things? Probably not.

Why won’t Greece’s creditors end the call for austerity measures?

Currently, Greece owes nearly twice its annual economic production in debt. Creditors want to institute spending cuts and tax increases to reduce its debts. Though they might be willing to restructure Greece’s debts in future negotiations, they don’t want to embolden populists in other countries by caving to Greek demands. They are taking a hard line in negotiations because they believe that the Eurozone is in better shape to handle a Greek default.

What will happen if talks fail?

It’s hard to know for certain how this game of chicken will play out. If negotiators fail to come to an agreement by the end of the month, the credit deal will expire and Greece will default on its debts (though it may use some extension provisions to avoid a formal default).

The risk that everyone’s worried about is that of a Greek exit from the Eurozone, or “Grexit.” Since the European Union’s inception, no country has left the currency or political union. The current situation will help define the future of the EU. Economists and EU leaders are worried about questions like:

• Can the EU survive the exit of a member country?
• Would Greece abandon the Euro but remain in the EU?
• Would a Grexit open the door for other countries to leave?

For U.S. investors, problems in Europe would be felt in U.S. exports (since Europe is a major trading partner), international exposure in portfolios, and as another factor in global economic growth. Right now, the U.S. economy appears to be doing well, so it’s unlikely that economic contagion would spread. Though financial markets would likely react badly to a Grexit, we can hope that positive domestic fundamentals would bring investor sentiment back. Though we can’t predict market movements, we’re watching the situation closely and will let you know if we feel any prudent adjustments need to be made.

This week, investors will be closely watching the Federal Open Market Committee meeting on Tuesday and Wednesday for clues about the Fed’s next steps. Realistically, Wednesday’s announcement will probably reiterate the Fed’s wait-and-see approach to the economy. We’ll keep you updated.

ECONOMIC CALENDAR:

Monday: Empire State Mfg. Survey, Industrial Production, Housing Market Index
Tuesday: Housing Starts
Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, Fed Chair Press Conference 2:30pm ET
Thursday: Consumer Price Index, Jobless Claims, Philadelphia Fed Business Outlook Survey

06-15-2015

HEADLINES:

Oil prices drop as Saudis get ready to produce. International oil prices fell again Friday on supply worries after major oil producer Saudi Arabia announced a potential deal to increase supplies to India. Higher global oil inventory could reignite worries of a supply glut.

Consumer sentiment jumps in June. A strengthening job market spurred American confidence in the economy, driving up a measure of consumer sentiment. This data suggests that the stage is set for stronger growth this quarter.

Job openings hit 14-year high in April. The number of open positions climbed by the most since 2000, indicating that the labor market continues to gain ground.

Retail sales jump in May. In another positive sign for the economy, retail sales surged by 1.2% in May as Americans increased their purchases of automobiles, furniture, and other big-ticket items.

 

5 Things We Learned From The May Jobs Report Weekly Update – June 8, 2015

Image courtesy of FreeDigitalPhotos.net/suphakit73

Image courtesy of
FreeDigitalPhotos.net/suphakit73

Markets ended lower last week as investors balanced an optimistic jobs report against renewed concerns about a Greek debt default. For the week, the S&P 500 lost 0.69%, the Dow fell 0.90%, and the NASDAQ slid 0.03%.[i]

On Friday, we got a look at how the labor market did in May. After jobs growth stuttered in the first quarter, investors were looking for reassurance that the economy can still support hiring. Here are three good things and two not-so-good things that we learned:

  1. The economy created 280,000 new jobs in May, beating expectations and leaving economists feeling optimistic about growth this quarter.[ii]
  1. The unemployment rate ticked upward to 5.5%, but that’s mostly a result of an increase in the number of people looking for jobs. A higher labor force participation rate is a good sign because it means people are feeling confident enough in job opportunities to go looking, so we’ll count this one as a positive.[iii]
  1. Lagging wage growth, which has concerned economists, appears to be reversing with U.S. workers adding $0.08/hour to their paychecks last month. Wage growth over the last three months is much closer to the 3.0% we’ve seen in past economic recoveries.[iv] Since economic growth depends heavily on consumer spending, we can hope that bigger paychecks will translate into a greater willingness to spend.
  1. In the not-so-great category, we learned that the majority of the new jobs created were in low-paying industries like retail, hospitality, temp work, home health services, etc.[v] Though we’re seeing an uptick in full-time work, many Americans are still struggling to find good-paying jobs, which may limit their ability to qualify for a mortgage and make big-ticket purchases.
  1. Productivity, measured in output per worker hour, registered a dismal 0.3% increase last month. Productivity is a major factor in long-term economic growth, and low labor productivity could be a warning sign. Is it cause for worry?

Probably not. Productivity is often tied to wages – higher wages have been seen to boost worker productivity – so we can hope that wage increases will boost output. There are also some economists who argue that the way productivity is estimated doesn’t account for technological improvements and shifts in the ways Americans work today.[vi]

Looking ahead, investors will be watching Greek debt negotiations closely to see whether creditors will bow to hardline Greek demands for loans without austerity measures, or whether they will allow debt-laden Greece to slide into default. We’ll also get a look at the latest retail sales and business inventories data, which will show us how consumers and businesses are spending this quarter.

 

ECONOMIC CALENDAR:

 Tuesday: JOLTS

Wednesday: EIA Petroleum Status Report, Treasury Budget

Thursday: Jobless Claims, Retail Sales, Import and Export Prices, Business Inventories

Friday: PPI-FD, Consumer Sentiment

6-8-2015

HEADLINES:

Greece delays debt payment to International Monetary Fund. Greece postponed a payment due Friday until the end of June. A government leader declared that Greece might hold snap elections to choose a new government.[vii]

American Pharoah wins Triple Crown at Belmont Stakes. The horse previously won the Kentucky Derby and Preakness races, bringing home the elusive Triple Crown for the first time since 1978.[viii]

 Oil settles up on lower rig count. Oil prices jumped Friday, sending domestic prices close to $60/barrel when an industry report showed that the number of U.S. drilling rigs fell for the 26th week in a row.[ix]

Mortgage rates remain high. Interest rates on 30-year fixed mortgages remained at 3.87% for the second week in a row, reaching the highest level since late 2014. High rates may curb housing market activity this season.[x]

[i] https://www.google.com/finance?q=INDEXDJX%3A.DJI%2CINDEXSP%3A.INX%2CINDEXNASDAQ%3A.IXIC&ei=wKN0VaDLG9TAjAGl44DoCA

[ii] http://www.cnbc.com/id/102736075

[iii] http://www.cnbc.com/id/102736075

[iv] http://fortune.com/2015/06/05/jobs-wage-increase/

[v] http://www.bls.gov/news.release/pdf/empsit.pdf

[vi] http://www.cnbc.com/id/102737213

[vii] http://www.foxbusiness.com/economy-policy/2015/06/05/greece-postpones-payment-to-imf/

[viii] http://www.foxbusiness.com/industries/2015/06/04/american-pharoah-winnings-2015-belmont-stakes-triple-crown-zayat-bob-baffert/

[ix] http://www.foxbusiness.com/markets/2015/06/05/active-us-oil-rig-count-down-26-weeks-in-row/

[x] http://www.foxbusiness.com/markets/2015/06/04/30-year-mortgage-rate-remains-highest-since-late-2014/

What’s the Big Deal Now in Greece? Weekly Update – June 1, 2015

U.S. markets ended the week on a down note as investors struggled with weak economic data and concerns about Greek debt negotiations. However, markets were able to end the month of May in the black. For the week, the S&P 500 lost 0.88%, the Dow dropped 1.34%, and the NASDAQ fell 0.38%.[i]

On Friday, we got a look at revised first-quarter gross domestic product (GDP) growth numbers, and we found out that the economy actually shrank 0.7 percent last quarter instead of growing.[ii] The news wasn’t unexpected, as economists knew that the economy struggled with issues like a harsh winter, a port shutdown, and a strong dollar that ate away at U.S. exports. However, it’s unwelcome because it means that the economy still hasn’t reached escape velocity and the recovery may still be fragile.

Though we don’t have data on the spring quarter yet, many economists expect a significant rebound in economic growth. We’ve seen estimates ranging from 1.0 percent to 3.2 percent, so it’s clear that there’s a lot of room for debate.[iii] Markets also took a hit from stalled Greek debt negotiations. Greece is currently deadlocked in talks with creditors for a new round of loans needed to service its debt and make government payments. To give you a brief bit of history: Greece was at the center of the European debt crisis after financial markets imploded in 2008.[iv]

To ward off a sovereign debt default, which might have touched off another European crisis, Greece accepted loans from European and international lenders in 2010. In exchange for the money, Greece agreed to institute austerity measures, massive cuts to government spending, designed to bring the national debt under control.

However, the cuts were deeply unpopular with Greek citizens, and a new leftwing Greek government elected in January rose to power on a wave of anger at the effects of austerity – rampant unemployment, brain drain, and low economic growth.[v]

What’s the big deal now? New Greek leaders refuse to reinstate austerity measures, and their creditors don’t want to extend more loans unless they meet their economic terms. If Greece doesn’t get another infusion of cash by its next debt deadline on June 5, the country will default on debt payments, which may trigger a banking crisis and possible exit from the European Union.[vi] Though the long-term effects of a “Grexit” (Greek exit) can’t be predicted, investors are likely to worry that where Greece goes, other countries may follow.

If Greece fails to reach an 11th-hour deal with its creditors this week, it’s likely that European and U.S. markets would react badly to the news. Let’s hope that this latest round of brinksmanship can be resolved; as always, we’ll keep you informed. The week ahead is also filled with domestic economic data, including the May employment report, which investors hope will show that the labor market continued its upward trend after a March blip.

 

ECONOMIC CALENDAR:

 Monday: Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Tuesday: Motor Vehicle Sales, Factory Orders

Wednesday: ADP Employment Report, International Trade, ISM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, Productivity and Costs

Friday: Employment Situation

6-1-15

HEADLINES:

Consumer sentiment beats expectations though still weak. U.S. consumers remain cautious about the current state of the economy, leading some analysts to worry about consumer spending this quarter.[vii]

Durable goods orders fall. Orders for long-lasting factory goods fell in April, but the underlying data indicates that business spending is slowly picking up. Excluding volatile transportation orders, orders climbed 0.5%.[viii]

New home sales rise more than expected in April. Sales of newly constructed single-family homes surged in April, indicating that a housing sector resurgence may be underway. Hopefully, the strengthening job market will support sales activity.[ix]

Pending home sales looking up. A forward-looking indicator of U.S. home purchases rose in April for the fourth straight month in a very positive sign for the housing sector. The gauge rose 14% over April 2014, the highest level since May 2006.[x]

 

[i] http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#{“comparisons”:”^DJI,^IXIC,^GSPC”,”comparisonsColors”:”#cc0000,#009999,#ff00ff”,”comparisonsWidths”:”1,1,1″,”comparisonsGhosting”:”0,0,0″,”range”:”ytd”,”showPrePost”:false}

[ii] http://www.marketwatch.com/story/us-gdp-turns-negative-in-first-quarter-again-2015-05-29

[iii] http://www.marketwatch.com/story/us-gdp-turns-negative-in-first-quarter-again-2015-05-29

[iv] http://www.nytimes.com/2015/04/09/business/international/explaining-the-greek-debt-crisis.html

[v] http://www.theguardian.com/world/2015/jan/25/greece-election-vote-austerity-leftwing-syriza-eu

[vi] http://www.bloomberg.com/news/articles/2015-05-25/greece-points-to-june-imf-payment-as-next-cliffhanger

[vii] http://www.foxbusiness.com/economy-policy/2015/05/29/consumer-sentiment-picks-up-in-may/

[viii] http://www.foxbusiness.com/economy-policy/2015/05/26/durable-goods-orders-slip-match-views-in-april/

[ix] http://www.foxbusiness.com/economy-policy/2015/05/26/new-home-sales-prices-rise-strongly-in-april/

[x] http://www.foxbusiness.com/economy-policy/2015/05/28/pending-home-sales-jump-more-than-expected-in-april/

Fed Upbeat About Economic Recovery Weekly Update – May 26, 2015

ID-100192676Despite flirting with new records, markets weren’t able to hold on to gains last week and closed mixed after comments about interest rates were made by Federal Reserve Chair Janet Yellen. For the week, the S&P 500 gained 0.16%, the Dow lost 0.22%, and the NASDAQ gained 0.81%.[1]

Yellen gave a speech Friday that underlined her determination to raise interest rates this year as long as the economic recovery continues. Though she didn’t really say anything new, her comments underscore the fact that the Fed is committed to returning to normal monetary policy as soon as economists feel the economy can handle it. She also emphasized that interest rate hikes will be done gradually over a period of years, which should help cushion the blow to financial markets.[2]

Could Yellen have been floating the idea to see how markets will react to a more aggressive stance on interest rates? Possibly. If so, the next few weeks could give us an idea of how investors will treat the news. Her speech also highlights her optimism about economic growth despite some weak reports in recent weeks.

Last week’s jobs report showed that the number of Americans filing new claims for unemployment benefits rose slightly to 274,000. However, the four-week moving average, a less volatile indicator, fell to the lowest level since April 2000.[3] Outside of the energy sector, which has lost thousands of jobs due to low oil prices, layoffs in the U.S. have been minimal in the past months.

Though jobless claims (a good indicator of layoffs) rose slightly, claims from Americans renewing unemployment applications fell to the lowest level since November 2000.[4] Currently, the overall trend is one of steady improvement in the labor market, which we hope will translate into higher consumer confidence and spending this summer.

Core inflation data also supports a move to higher interest rates later this year. The Fed has the “dual mandate” of keeping unemployment low and inflation stable and had tied monetary policy changes to two numbers: a headline unemployment rate of 5.2-5.6% and annual inflation of 2.0%.[5] While the employment goal has been reached, the inflation target has been more elusive.

While some economists have worried about too-low inflation, the latest Consumer Price Index (CPI) figures suggest that core CPI, the number most used by economists, rose 1.8% in the last year. This stable rise, just under the Fed’s target, indicates that price pressures remain stable but are moving higher and closer to the 2.0% goal.[6]

Looking ahead, analysts will be closely watching Friday’s second reading of the Q1 Gross Domestic Product (GDP) report. Unfortunately, the news isn’t expected to be good, and many economists expect to see that the economy shrank amid harsh winter weather and dock strikes. However, there’s considerable hope that the economy is rebounding in the second quarter (much as it did last year).[7]

ECONOMIC CALENDAR:

 Monday: U.S. Markets Closed For Memorial Day Holiday

Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, New Home Sales, Consumer Confidence, Dallas Fed Mfg. Survey

Thursday: Jobless Claims, Pending Home Sales Index, EIA Petroleum Status Report

Friday: GDP, Chicago PMI, Consumer Sentiment

2015-05-26

HEADLINES:

Factory growth slows for second month. Growth in the U.S. manufacturing sector, a major driver of economic activity, slowed down for another month in May. New orders increased at a very slow pace, indicating that next month might be slow as well.[8]

U.S. gas prices at six-year low. Just in time for the summer driving season, pump prices across the nation are at a multi-year low. According to AAA, average gas prices were just $2.74 across the country. Hopefully, fuel savings will result in greater consumer spending.[9]

Greece can’t pay its June bills. Greek leaders announced that they won’t be able to make debt repayments next month unless they receive another round of rescue funding. Despite months of negotiation, it’s unclear whether a deal can be reached that would prevent Greek insolvency.[10]

April housing starts surge. Groundbreaking and permits for new homes spiked in April to the highest level in over seven years, indicating that homebuilders were confident about future sales. March numbers were also revised upward in a very hopeful sign for the housing market.[11]

 

 

[1] https://www.google.com/finance?q=INDEXDJX%3A.DJI%2CINDEXSP%3A.INX%2CINDEXNASDAQ%3A.IXIC&ei=wQxiVdmaM5S1mAHoh4BY

[2] http://www.businessinsider.com/janet-yellen-us-economic-outlook-speech-may-22-2015-5

[3] http://www.cnbc.com/id/102697540

[4] http://www.cnbc.com/id/102697540

[5] http://www.foxbusiness.com/economy-policy/2015/05/22/us-consumer-prices-soft-underlying-inflation-pushes-up-116548863/

[6] http://www.foxbusiness.com/economy-policy/2015/05/22/us-consumer-prices-soft-underlying-inflation-pushes-up-116548863/

[7] http://www.foxbusiness.com/economy-policy/2015/05/22/week-ahead-1q-gdp-revision-and-housing-data/

[8] http://www.cnbc.com/id/102698399

[9] http://www.foxbusiness.com/personal-finance/2015/05/22/memorial-day-gas-prices-touch-6-year-low/?intcmp=bigtopmarketfeaturesside

[10] http://www.marketwatch.com/story/greece-wont-meet-imf-repayments-in-june-interior-minister-says-2015-05-24

[11] http://www.cnbc.com/id/102690006

What’s Going On With The Economy and Interest Rates? Weekly Update – May 18, 2015

Image courtesy of FreeDigitalPhotos.net/Danilo Rizzuti

Image courtesy of
FreeDigitalPhotos.net/Danilo Rizzuti

Markets ended on a high note with the S&P 500 setting a new record though economic data was lukewarm.[1] For the week, the S&P 500 gained 0.31%, the Dow grew 0.45%, and the NASDAQ rose 0.89%.[2]

Months of tepid economic data and flirtation with higher interest rates lead many to ask:

What’s going on with the economy, and how will it affect the Federal Reserve’s interest rate decision?

The Fed, which has kept interest rates low to help the economy out of the 2008 financial crisis, needs to start returning to “normal” monetary policy to keep inflation in check and to prevent too-low interest rates from spurring another asset bubble. However, raising rates too soon could derail the economic recovery, so the Fed is being quite cautious.[3]

The Fed has emphasized flexibility in its approach to raising rates, which doesn’t give us much of an idea of when they will raise rates. Right now, the consensus among economists is that the first rate hike will come in September, though it’s not at all certain.[4]

Let’s take a look at a couple of major indicators that give us a brief snapshot of the economy right now:

The latest jobs data shows that the labor market is improving. The economy added 223,000 new jobs in April, and the number of underemployed Americans is dropping.[5] Another recent report shows that the number of workers voluntarily quitting their jobs has hit its highest point since 2008 as Americans gain confidence in new opportunities.[6]

In the first quarter, economic growth flat lined, increasing just 0.2%, due to a combination of factors.[7] However, many economists expect the economy to shake off some of its headwinds and pick up this quarter.

Corporate profits in the first quarter were up a respectable 2.4% for S&P 500 companies (as of May 15, 2015), though revenues were down 3.7%.[8] However, companies have all lowered their expectations for the second quarter, indicating that they’re still worried about domestic and global demand.

All of these indicators paint a picture of an economy that’s still chugging along without showing the breakout growth we had hoped for this year. Though a recession doesn’t seem likely, there are a number of global headwinds that may continue to dog the economy: volatile oil prices, a Chinese slowdown, and tepid consumer spending.

What would the Fed like to see before raising rates?

Recent statements from the Fed indicate that it is still in wait-and-see mode. Waiting to see what? A solid, sustainable turnaround in economic growth that’s supported by the labor market. The deceleration of economic growth in the first quarter and a lack of wage growth gave the Fed pause for thought, and economists will want to see sustainable improvements in indicators like durable goods orders, business investment, and GDP growth before making their next policy move.[9]

What does this mean for investors?

Bottom line: We can expect markets to remain choppy as investors take stock of current conditions and try to determine where markets are going. Overall, we’re cautiously optimistic about market performance. However, we recognize that persistent market highs in the face of mediocre data could set the stage for a short-term pullback. As always, we’re keeping an eye on conditions and will let you know when anything changes.

ECONOMIC CALENDAR:

 Monday: Housing Market Index

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales

Friday: Consumer Price Index, PMI Manufacturing Index Flash, Janet Yellen Speaks 1:00 PM ET

 5-18-15

Weekly unemployment claims fall unexpectedly. The most recent weekly jobs report showed that layoffs are dropping and new unemployment claims are close to the 15-year lows reached several weeks ago.[10]

HEADLINES:

 Retail sales unchanged from March. Though March numbers were revised upward, April retail sales data was flat as Americans cut back on big-ticket purchases like televisions and autos. Economists had hoped that Americans would spend – rather than save – the money they pocketed from cheaper gasoline.[11]

 China is America’s largest creditor (again). Though central banks around the world have decreased their holdings of U.S. Treasuries, China’s central bank is back on top with $1.261 trillion. Central banks hold foreign currency reserves mainly to cushion currency exchange rate shocks and keep rates steady.[12]

Mortgage applications fall as rates rise. A sharp rise in interest rates last week caused a drop in mortgage applications for both buyers and refinancers. Though mortgage volume is still up 14% from the same time last year, volume is shrinking as homebuyers balk at higher rates.[13]

 

[1] http://www.foxbusiness.com/markets/2015/05/15/indecisive-day-on-wall-street-ends-with-stock-indexes-mostly-higher-sp-500-at/

[2] https://goo.gl/HBaZDb

[3] http://fortune.com/2014/10/08/federal-reserve-interest-rates-2/

[4] http://blogs.wsj.com/economics/2015/05/14/wsj-survey-most-economists-see-fed-raising-rates-in-september/

[5] http://www.foxbusiness.com/markets/2015/05/08/traders-cautious-ahead-april-jobs-report/

[6] http://www.usnews.com/news/articles/2015/05/12/us-workers-are-confident-and-quitting-jolts-report-implies

[7] http://www.foxbusiness.com/markets/2015/04/29/us-gdp-grows-scant-02-in-first-quarter/

[8] http://www.zacks.com/commentary/46056/retail-in-the-spotlight-as-earnings-season-winds-down

[9] http://www.bloomberg.com/news/articles/2015-04-29/what-the-fed-needs-to-see-before-it-raises-rates

[10] http://www.foxbusiness.com/economy-policy/2015/05/14/weekly-jobless-claims-fall/?intcmp=obnetwork

[11] http://www.cnbc.com/id/102674466

[12] http://www.cnbc.com/id/102684920

[13] http://www.cnbc.com/id/102673397

Remember What Happened May 6, 2010? Weekly Update – May 11, 2015

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Image courtesy of
FreeDigitalPhotos.net/renjith krishnan

In this week’s commentary, we want to draw your attention to a significant market anniversary. Five years ago, on May 6, 2010, the U.S. stock market experienced a “flash crash” when the Dow Jones Industrial Average plummeted nearly 1,000 points in minutes, erasing almost $1 trillion in market value. The Dow immediately reversed itself and regained much of the lost ground that day. The event, caused by a large institutional trading program, was the largest single day drop in market history and caused an immediate media frenzy.[1]

In the weeks after the crash, news outlets blazed with headlines like: “Mean Street: Crash — The Machines Are in Control Now” and “Was Last Week’s Market Crash a Direct Attack By Financial Terrorists?”[2] Fear mongering by talking heads led many investors to worry that they were outclassed by big traders. A London-based trader was indicted last month for contributing to the 2010 crash by placing fraudulent orders that helped spark the selloff.[3] Fortunately, the flash crash was a miniscule blip on the market radar and ended up having very little effect on most investors.

So, what have we learned in the five years since then?

Despite panics and flash crashes, financial markets are still functioning. You’ll always find someone to tell you that the sky is falling and markets won’t recover from some event. Though the past can’t predict the future, U.S. markets have survived panics, crashes, bubbles, and crises and risen again.

Today’s markets are volatile and unpredictable. Smart investors don’t worry too much about what markets are doing this week, this month, or even this year. Instead, they focus on their own financial goals and create strategies that can withstand challenging market environments.

Flash crashes (or some other minor event) could happen again. Today’s markets are flooded by orders generated by sophisticated trading programs and institutional investors. Though Congress acted swiftly to institute “circuit breakers” that pause trading in stocks that experience a violent swing, it’s possible that another confluence of events or intermarket feedback loop could cause a similar problem in the future.[4]

Since we can’t predict these “black swan” events, all we can do is build prudent strategies and carefully manage risk.

Things aren’t always as bad as the media makes them out to be. The media makes money on eyeballs and shocking headlines. It’s absolutely critical to both your portfolio and your mental health that you learn to tune out the noise and focus on fundamentals. One of the greatest advantages of working with financial professionals is that we keep an eye on economic and market events for you. We are also trained to take emotion out of the equation and make rational decisions in the face of market movements.

If you’re ever worried about where markets are going or have questions about how events affect your financial picture, please reach out to us. While we can’t predict markets, we are always available to offer reassurance and answer questions.

ECONOMIC CALENDAR:

 Monday: Factory Orders

Tuesday: JOLTS, Treasury Budget

Wednesday: Retail Sales, Import and Export Prices, Business Inventories, EIA Petroleum Status Report

Thursday: Jobless Claims, PPI-FD

Friday: Empire State Mfg. Survey, Industrial Production, Consumer Sentiment, Treasury International Capital

Capture

HEADLINES:

Jobs rebounded in April. U.S. job growth surged in April, and the unemployment rate dropped to a multi-year low. Tempering the good news, the March report was revised to show that just 85,000 new jobs were created.[5]

Eurozone economy grew in first quarter. Despite worries about Europe’s weak growth prospects, experts believe that the Eurozone economy may have grown at a faster pace than the U.S. economy.[6]

Despite drop in sales, wholesalers increase inventories in March. Wholesalers, the firms that supply U.S. retailers, slightly increased their inventories in March in anticipation of Spring-led retail demand. Higher retail sales would spur restocking and boost their sales.[7]

Puerto Rico braces for austerity measures. Faced with financial shortfalls and $72 billion in public debt, the U.S. territory slashed its proposed budget and requested help in finding a solution to the fiscal crisis. If a solution is not found, the Puerto Rican government could stop debt repayments.[8]

 

Footnotes:

[1] http://money.cnn.com/2010/10/01/markets/SEC_CFTC_flash_crash/

[2] http://blogs.wsj.com/deals/2010/05/06/mean-street-crash-the-machines-are-in-control-now/, http://www.alternet.org/story/146793/was_last_week’s_market_crash_a_direct_attack_by_financial_terrorists

[3] http://www.usatoday.com/story/money/markets/2015/05/06/uk-flash-crash-trader-navinder-singh-sarao/70881770/

[4] http://money.cnn.com/2010/06/10/markets/SEC_circuit_breakers_rules/index.htm?postversion=2010061013

[5] http://www.foxbusiness.com/markets/2015/05/08/traders-cautious-ahead-april-jobs-report/

[6] http://www.cnbc.com/id/102665345

[7] http://www.foxbusiness.com/markets/2015/05/08/us-wholesale-stockpiles-up-slight-01-percent-in-march-despite-eighth-straight/

[8] http://www.foxbusiness.com/markets/2015/05/08/puerto-rico-braces-for-austere-budget-amid-warnings-financial-shortfall/

Hixon Zuercher May 2015 Monthly Video Update

First Look at Q1 Economic Growth Weekly Update – May 4, 2015

Image courtesy of FreeDigitalPhotos.net/cooldesign

Image courtesy of
FreeDigitalPhotos.net/cooldesign

Markets fell last week as investors digested lukewarm economic data and considered future economic growth prospects. However, stocks bounced back on Friday and trimmed their losses. For the week, the S&P 500 lost 0.44%, the Dow slid 0.31%, and the NASDAQ dropped 1.70%.1

Last week, investors got their first look at Q1 economic growth. The advance estimate of Gross Domestic Product showed that the economy basically ground to a halt in the first quarter, growing just 0.2%. Though this early report is based on incomplete data, the picture so far shows that exports plunged, businesses slashed spending, and consumers kept their pocketbooks closed.2

While some of the weakness is due to a cold winter and a West Coast port strike, the effects of a strong dollar and weak global demand may linger into the second quarter. So far, we know that consumer spending edged upward in March and that wages increased in the first quarter, giving Americans more money to spend.3

The Federal Reserve’s policy-setting Open Market Committee also met last week to take stock of the economy and discuss future interest rate policy. As expected, the central bank made no moves to raise rates and emphasized that any future rate hikes will be based on a careful analysis of the economic environment. Bottom line: It’s unlikely that rate hikes will come before the fall.4

Can markets sustain the rally amid sputtering economic growth? We can’t know for sure, but we are keeping a close eye on factors like business investment, corporate expectations, and future economic growth projections to guide our decision-making process. While fundamentals show that the economy is still growing, obstacles like weak business investment, cautious spending, and global growth concerns may lead to a market pullback in the coming weeks and months.

Since the bottom of the last bear market in 2009, the S&P 500 has returned over 200%.5 Though we’ve had some bumps in the road, we haven’t experienced a serious 10%+ correction since 2011.6 Some analysts believe that we are overdue for pullback while others have a brighter outlook on market performance.7 Since history never repeats itself exactly, we don’t believe it’s useful to worry about what might be around the corner. Instead, we focus on creating personalized strategies that pursue our clients’ goals and then make prudent adjustments as conditions warrant.

ECONOMIC CALENDAR:

Monday: Factory Orders

Tuesday: International Trade, ISM Non-Mfg. Index

Wednesday: ADP Employment Report, Productivity and Costs, Janet Yellen Speaks

9:15 AM ET, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Employment Situation

Capture

HEADLINES:

Weekly jobless claims plummet. The number of Americans filing new claims for unemployment benefits, an indicator of layoffs, fell to the lowest level since 2000. These numbers suggest that the weak March jobs report was a seasonal aberration.8

April consumer sentiment at 2nd highest level since 2007. A monthly indicator of consumer sentiment rose last month as Americans became more optimistic about current and future conditions. Though consumers are worried about interest rates, they are more confident about jobs and income prospects.9

Motor vehicle sales driven by trucks and SUVs. Cheap gas appears to have reignited Americans’ love affair with big vehicles; though April is typically a slow month for auto sales, demand for sport-utilities and trucks accounted for about half of April’s sales.10

Manufacturing growth slows in April. Though the manufacturing sector is growing, the pace of growth fell last month to the slowest pace in almost two years. Though new orders are up (a good sign for future growth), employment is down to its lowest level in five years.11